By Michael L. Moskowitz and Adrienne Woods

Weltman & Moskowitz, LLP was retained by one of the few remaining dairies located in New York State to file a chapter 11 bankruptcy petition (“Debtor” or “Client”). Due to a downturn in the industry, Client was forced to close its doors after more than 150 years of operating its family-owned business. While production and other operating costs had steadily increased, sales had significantly decreased leaving the business unprofitable. When the bankruptcy was filed, it was anticipated the business would be sold to a previously-located purchaser (“Purchaser”) with whom Client had been negotiating for several months. Unfortunately, as Client’s business continued to lose customers and profitability fell, the Client was forced to renegotiate the sale price to an exponentially lower number and, ultimately, the Purchaser withdrew its offer entirely. As a result, the client was obliged to liquidate its few hard assets (the client’s business value was primarily tied to business relationships) and collect accounts receivable with a new goal of filing a liquidating plan under chapter 11.

As a result of the lower purchase price, Client lost support of management that oversaw the multi-employer pension fund (“Fund”) in which it had participated. Specifically, Fund moved to dismiss the case alleging bad faith under both the Bankruptcy Code and ERISA law.

Fund filed a claim for more than $3 million against Debtor’s estate for withdrawal liability, which occurs when a member of a multi-employer pension fund ceases making payments into the plan. The withdrawal liability claim was only a general unsecured claim under the Bankruptcy Code, not entitled to any priority. As such, Fund was entitled to be paid on its allowed claim pro rata with all other general unsecured creditors. The amount of Fund’s allowed claim had not yet been determined, as Debtor objected to Fund’s claim under a separate section of ERISA not relevant to this discussion. In this case, general unsecured claims aggregated more than $2.6 million, exclusive of Fund’s claim. While Fund believed the sale, as initially proposed, would have provided it a substantial recovery, the reduction in purchase price provided substantially less for all general unsecured creditors. The auction that eventually occurred, coupled with collection of accounts receivable, similarly provided a more limited distribution for general unsecured creditors. As such, while Fund previously consented to the sale as it was initially proposed, it sought to dismiss Debtor’s case when it realized that it would receive significantly less of a recovery on its claim.

In its motion to dismiss, Fund argued Debtor filed its bankruptcy case in bad faith, thus warranting conversion or dismissal under Section 1112(b) of the Bankruptcy Code. Specifically, Fund asserted Debtor’s bankruptcy was filed in bad faith as violative of Section 4212(c) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").

ERISA Section 4212(c) provides that “[i]f a principal purpose of any transaction is to evade or avoid liability under this part, this part shall be applied (and liability shall be determined and collected) without regard to such transaction.” Fund alleged three (3) separate occurrences constituted transactions, within the meaning of Section 4212(c), by which Debtor allegedly attempted to evade or avoid withdrawal liability: (i) the filing of the bankruptcy petition itself; (ii) “negotiating” a lower sale price with Purchaser; and (iii) objecting to Fund’s claims against the estate.

Weltman & Moskowitz, LLP, on behalf of Debtor, challenged Fund’s motion to dismiss demonstrating the necessity of Debtor’s bankruptcy filing to maximize recovery for all creditors of the estate. We also established that, contrary to Fund’s assertions, Debtor did not negotiate to lower the sale price to Purchaser, but rather Purchaser lowered – and ultimately withdrew – its offer due to a significant decline in the value of the operating assets (i.e.; the loss of customer relationships during the pendency of the bankruptcy case). Finally, we successfully argued Debtor’s objection to Fund’s claims was not an attempt to evade or avoid withdrawal liability, but rather an exercise of Debtor’s fiduciary duty to object to improper and overvalued claims to maximize distribution to all creditors entitled to a recovery from the estate. The bankruptcy court agreed and denied Fund’s motion to dismiss the case, acknowledging in a lengthy and well-reasoned opinion that Debtor had not violated Section 4212(c) of ERISA and concluding there were no bad faith grounds to dismiss Debtor’s case. A copy of the decision is available upon request.

Bankruptcy law commonly intersects with various other areas of law, and as an experienced bankruptcy law firm, Weltman & Moskowitz, LLP is well-positioned to recognize and address the interplay between these complex and sometimes contradictory disciplines. Weltman & Moskowitz, LLP also has the benefit of long-term relationships with practitioners who specialize in other practice areas when their expertise is required.

Call or email Richard E. Weltman or Michael L. Moskowitz to learn what special considerations may apply to your bankruptcy claim or anticipated filing.

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About Weltman & Moskowitz, LLP, A New York and New Jersey Business, Bankruptcy, and Creditors’ Rights Law Firm:

Richard E. Weltman and Michael L. Moskowitz jointly founded Weltman & Moskowitz, LLP, in 1987. Weltman & Moskowitz, LLP is a business, creditor’s rights and bankruptcy law firm serving clients throughout New York, New Jersey, Long Island, and beyond. The firm concentrates on lender’s rights, corporate insolvency, resolution of commercial disputes, loan workouts and modifications, shareholder and partnership contests, business divorce, dissolution, and business and bankruptcy litigation, arbitration, and mediation of all types. The firm also assists with corporation, partnership, and limited liability company counseling, formation, operation, and preparing and negotiating many kinds of secured lending, leasing, shareholder, buy-sell, consulting, technology, and joint venture agreements. Michael and Richard may be reached at 212.684.7800, 201.794.7500, or via email at and